• We maintain our HOLD recommendation on Kossan Rubber Industries (Kossan) with a lower fair value of RM7.07 (from RM7.50) as we roll our valuation to FY22 based on a 5-year average PER of 27x. We raise our FY20–22 net profit forecasts by 24%, 22% and 26% respectively by imputing higher average selling prices (ASPs). We increase our ASP assumption to US$34/1,000 pieces (from US$30) for FY20; US$37/1,000 pieces (from US$30) FY21 and US$30/1,000 pieces (from US$27) for FY22. We assume lower ASP in 2020 due to the available of vaccine which may reduce the demand of gloves.

• Kossan’s 9MFY20 core PATAMI of RM540.8mil (+230% YoY) made up 75% of our and 73% of consensus full-year earnings estimates. We deem this to be above expectations as we expect much stronger earnings in 4QFY20 resulting from a gradual increase in ASP.

• The glove division’s 9MFY20 revenue climbed 46% YoY to RM2,346.5mil on the back of strong demand growth from the Covid-19 pandemic. Sales volume rose 20.8% YoY. 9MFY20 glove ASP increased marginally by 15%–17% YoY. Nitrile material’s price was lower by 6%–8%% while latex fell less than 1% for the same period. As a result, the glove division’s 9MFY20 PBT grew 250% YoY to RM644.4mil. PBT margin was higher at 30.3% as compared with 12.7% YoY.

• Kossan’s capacity has been fully taken up until end of 2021 while still receiving orders for 2022. Around 10%–15% of its total capacity have been allocated for spot orders. Management indicated that incoming capacity will be directed to short-term orders.

• To date, 10 production lines Plant 19 have been fully commissioned in August 2020 with additional capacity of 3bil pieces per annum. Meanwhile, 5 lines with an annual capacity of 1.5bil pieces of Plant 20 will begin commissioning in 1QFY21 and expect to be fully commissioned by 1HFY21. This will bring Kossan’s total capacity to 33.5bil pieces/year.

• The technical rubber product (TRP) division’s 9MFY20 revenue and PBT slid by 19.1% and 34.4% to RM110mil and RM14.7mil respectively. The weaker performance was impacted by the movement control order (MCO) in 1HFY20 and a general slowdown in the infrastructure and automotive industries due to the Covid-19 pandemic.

• In September 2020, the Malaysian Rubber Glove Manufacturers Association (Margma) revised upwards its forecast for glove export revenue and volume by 36.7% and 9.1% respectively to RM29.8bil and 240bil pieces from RM21.8bil and 220bil pieces in its July 2020 forecast.

• We like Kossan as it is one of the biggest glove producers to benefit from the Covid-19 pandemic due to its expansionary plans and efforts in improving quality and operational efficiency. However, we believe that the stock is fully valued with a PER of 29x FY22F EPS. Maintain HOLD.

Source: AmInvest Research - 10 Nov 2020